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Overview of Islamic Banking Industry of Pakistan
& Potential for Initial Public Offering
October 2013

Umair Munaf Moon...
Karachi Stock Exchange

2

Five Years Progress Chart
6,000

660
651

5,000

5,259
640

638

Amount in Rs. (Billion)

4,242...
Reasons for Decline in Listed Companies at KSE
Establishment of a more stringent regulatory framework through a number of
...
Karachi Stock Exchange

4

Newly listed Companies at KSE – Last Five Years

Net Capital flow from listing and delisting
of...
Karachi Stock Exchange

5

IPO Price to Book Ratio
Year

2013
2012

2011

2010

2009

2008

Share offered @
Premium of Rs....
Karachi Stock Exchange

6

Listing of Companies (2008-2013)
Listing By Sectors
Power, 4

Financial Sector, 6

Other, 8

Fe...
Karachi Stock Exchange

7

Newly listed Companies at KSE – Last Five Years
Not a single bank was listed during the last fi...
Banking Sector

8

Future Outlook
Outlook for Pakistan's banking system remains negative, reflecting banks' large and
incr...
Islamic Banking

9

Islamic Banking in Pakistan has tremendous growth potential
Islamic banking in Pakistan has witnessed ...
Constraints to Pakistan’s Economic Growth
The fiscal deficit has widened from 5% of GDP in FY 2008 - 2009 to about 8.8% of...
Comparable Analysis

11

Domestic Price to Book (x) Multiple of Mid Tier Banks
P/B (x)
Silk Bank

0.81

JS Bank

0.46

Fay...
Valuation

12

Pakistan Price to Book (x) Multiple Valuation

Approach: P/B (X) Multiple for
Pakistan Mid Tier banks

P/B ...
Factors to be Considered For IPO

13

Factors

Assessment

Duration of IPO Process

LENGHTY

IPO Market Performance

WEAK
...
14

Thank You

The 8th GSM, Nov 2009, Manama, Pakistan

Prepared By: Umair Munaf Moon
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Overview of Islamic banking industry & potential for Initial Public Offering

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Overview of Islamic Banking Industry of Pakistan
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  1. 1. 1 Overview of Islamic Banking Industry of Pakistan & Potential for Initial Public Offering October 2013 Umair Munaf Moon Manager Operational Risk Albaraka Bank Pakistan Ltd The 8th GSM, Nov 2009, Manama, Pakistan Prepared By: Umair Munaf Moon
  2. 2. Karachi Stock Exchange 2 Five Years Progress Chart 6,000 660 651 5,000 5,259 640 638 Amount in Rs. (Billion) 4,242 620 4,000 3,269 3,000 600 2,946 2,706 580 573 2,000 564 1,000 560 540 - No. of Listed Companies 644 520 Dec-09 Dec-10 Total Market Capitalization Dec-11 Dec-12 Sep-13 Total Number of Listed Companies Reasons for Delisting: i) Violation of listing regulations ii) Voluntary delisting SOURCE: KARACHI STOCK EXCHANGE The 8th GSM, Nov 2009, Manama, Pakistan Prepared By: Umair Munaf Moon
  3. 3. Reasons for Decline in Listed Companies at KSE Establishment of a more stringent regulatory framework through a number of initiatives, most recently in the shape of a corporate governance code, played an important role in scaring away at least a few companies that wished to go public. Poor economic conditions in recent years, as fewer companies considered it viable to raise capital through a public offering. After the 2008 Global Crisis, world industrial growth suffered and there was no appetite for investment, which resulted in fewer IPOs. Declining trend in IPOs is not Pakistan-specific. Rather, it is a global phenomenon. Number of IPOs in 2012 slumped to lowest level since financial crisis, as signs of economic slowdown curbed demand & prompted companies to push back sales. The annual global IPO tally declined for a second straight year… In Asia, the biggest region for IPOs, proceeds fell 43% to $46.7 billion. (BLOOMBERG) Tax rates in Pakistan are also skewed towards non-listed entities, which discourage companies from going public. The current corporate tax rate for both listed and nonlisted companies in Pakistan is 35%. SOURCE: Nadeem Naqvi, Managing Director, KSE. The 8th GSM, Nov 2009, Manama, Pakistan Prepared By: Umair Munaf Moon 3
  4. 4. Karachi Stock Exchange 4 Newly listed Companies at KSE – Last Five Years Net Capital flow from listing and delisting of Companies in Rs (Million) 70 68 20,000 50 14,066 15,000 10,000 5,000 30 8,444 4 9 7 4 6 4 2 1,184 11 10 2 -10 Dec-09 Dec-10 Dec-11 Dec-12 (5,000) Sep-13 (4,547) Capital Inflow / Outflow of Companies New Listed Companies -30 Number of Delisted Companies SOURCE: KARACHI STOCK EXCHANGE The 8th GSM, Nov 2009, Manama, Pakistan Prepared By: Umair Munaf Moon Number of New Delisted / Listed Companies 24,495 25,000
  5. 5. Karachi Stock Exchange 5 IPO Price to Book Ratio Year 2013 2012 2011 2010 2009 2008 Share offered @ Premium of Rs. Company Name Lalpir Power Ltd Next Capital Ltd TPL Trakker Ltd Aisha Steel Mills Ltd International Steels Ltd Pakgen Power Ltd Engro Foods Ltd TPL Direct Insurance Ltd Ghani Gases Ltd Fatima Fertilizer Company Ltd Safe Mix Concrete Products Ltd Agritech Ltd Amtex Ltd Wateen Telecom Ltd Media Times Ltd Nishat Power Ltd Nishat Chunian Power Ltd Arif Habib Bank Ltd * Invest and Finance Securities Ltd Thatta Cement Company Ltd Dawood Equities Ltd Engro Polymer & Chemicals Ltd KASB Securities Ltd First Credit and Investment Bank Ltd Descon Oxychem Ltd Rs. 12.00 Rs. 4.06 Rs. 9.00 Rs. 15.00 Rs. 4.00 Rs. 3.50 Rs. 2.50 Rs. 20.00 Rs. 3.00 Rs. 11.00 Rs. 12.50 Rs. 7.50 Rs. 8.00 Rs. 57.50 - *IPO P/B Ratio = Current Share Price / Net Issue Price The 8th GSM, Nov 2009, Manama, Pakistan Prepared By: Umair Munaf Moon Net Issue Price in Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. 22.00 10.00 10.00 10.00 14.06 19.00 25.00 10.00 14.00 13.50 12.50 30.00 13.00 10.00 10.00 10.00 10.00 21.00 10.00 22.50 17.50 18.00 67.50 10.00 10.00 Share Price as at 09-Oct-13 (Rs.) Price To Book Ratio Rs. 18.99 Rs. 4.28 Rs. 7.00 Rs. 8.05 Rs. 17.70 Rs. 20.00 Rs. 100.43 Rs. 8.99 Rs. 15.82 Rs. 24.80 Rs. 8.50 Rs. 12.25 Rs. 2.29 Rs. 4.50 Rs. 3.16 Rs. 31.01 Rs. 37.26 Rs. 29.50 Rs. 14.00 Rs. 25.79 Rs. 2.03 Rs. 13.04 Rs. 6.16 Rs. 3.00 Rs. 5.80 0.86 0.43 0.70 0.81 1.26 1.05 4.02 0.90 1.13 1.84 0.68 0.41 0.18 0.45 0.32 3.10 3.73 1.40 1.40 1.15 0.12 0.72 0.09 0.30 0.58 SOURCE: KARACHI STOCK EXCHANGE
  6. 6. Karachi Stock Exchange 6 Listing of Companies (2008-2013) Listing By Sectors Power, 4 Financial Sector, 6 Other, 8 Fertilizer, 2 Chemical, 2 Steel, 2 Bank, 1 Price to Book Ratios (x) Issue Price 12 @ Par 15 10 15 @ Premium 2 NA P/B Above 1 P/B Below 1 SOURCE: KARACHI STOCK EXCHANGE The 8th GSM, Nov 2009, Manama, Pakistan Prepared By: Umair Munaf Moon
  7. 7. Karachi Stock Exchange 7 Newly listed Companies at KSE – Last Five Years Not a single bank was listed during the last five years, last Bank to get listed was ARIF HABIB BANK on 11-Feb-2008. Total number of new listings at KSE was 20 as compared to 97 delisted companies since year 2009. Net capital Outflow in year 2013 shows lack of interest from investors in IPO Market. Total Listed Companies at KSE are 27 since year 2008. Out of 27 Listings, 15 issued their shares on Premium. Out of 27 Listings, shares of 9 companies were subscribed by underwriters due to its unpopularity in Stock Market. Price to Book (P/B) Ratios of most of the companies is below 1. Only Power & FMCG Sectors witnessed a better P/B Ratios amongst all 27 Listings. SOURCE: KARACHI STOCK EXCHANGE The 8th GSM, Nov 2009, Manama, Pakistan Prepared By: Umair Munaf Moon
  8. 8. Banking Sector 8 Future Outlook Outlook for Pakistan's banking system remains negative, reflecting banks' large and increasing holdings of government bonds, which render their balance sheets vulnerable to sovereign credit risk and the challenging domestic operating environment which will continue to pressure asset quality. These negative pressures are only partly mitigated by banks' low cost and stable deposit-funded profiles. Banks' high and increasing exposure to Pakistani government debt will remain a major source of credit risk, as the government will continue to run large deficits over the outlook period, which will be financed in a large part by domestic banking sector. Operating conditions will also remain challenging due to low growth rate, significant fiscal imbalances, low foreign exchange reserves, fragile political environment and structural problems, particularly in the energy sector where power outages have depressed manufacturing activities and led to a fall in private investment. This will suppress demand for credit and lead to increases in NPLs which stood at 14.7 percent as of March, 2013. Also, reported NPL figures understate the full extent of asset-quality deterioration in the banking system due to high level of problematic government guaranteed loans that are not classified as NPLs. SOURCE: Moody's Investors Service, 22nd July, 2013 The 8th GSM, Nov 2009, Manama, Pakistan Prepared By: Umair Munaf Moon
  9. 9. Islamic Banking 9 Islamic Banking in Pakistan has tremendous growth potential Islamic banking in Pakistan has witnessed significant growth during the last decade and now constitutes over 10 percent of the country’s banking system with an asset base of above Rs 900 billion and a network of more than 1,100 branches Given the interest of all stakeholders and relatively high level of financial exclusion in the country, this expansionary trend is likely to continue and the industry is well set to double its market share by 2020 Promoting Islamic finance as a viable and competitive component of the financial system through enabling legal, regulatory and supervisory environment has remained an important component of SBP‟s strategic goals. SBP have accordingly developed the five year Strategic Plan for Islamic Banking industry again through a rigorous and meaningful consultation with all the key stakeholder SOURCE: SBP, Islamic Banking Bulletin Apr-June 2013 16 1,097 14 751 10 800 651 Full Fledge Islamic Banks 515 8 6 600 400 289 4 150 17 48 1200 1000 886 12 2 1,115 200 70 0 0 FY03 FY04 FY05 FY06 FY07 The 8th GSM, Nov 2009, Manama, Pakistan FY08 FY09 FY10 FY11 FY12 Prepared By: Umair Munaf Moon FY13 Conventional Banks with IB Branches Total No. of Branches*
  10. 10. Constraints to Pakistan’s Economic Growth The fiscal deficit has widened from 5% of GDP in FY 2008 - 2009 to about 8.8% of GDP in FY 2012 – 2013. Depleting Foreign Exchange reserves further weakens the domestic currency by 9% against USD since Jan 2013. According to IMF, on-going currency depreciation and reduced energy subsidies will likely result in higher inflation in Pakistan. A circular debt of Rs 100 billion has resurfaced in the power sector despite clearance of the previous circular debt of Rs 503 billion. World Bank has identified macro economic instability, massive cuts in electricity access, leading to high country risk and a sudden stop in external, domestic financing and government failures as some of the major constraints of growth in Pakistan. Persistent deterioration in the law & order situation of the country further act as a barrier to economic growth. The 8th GSM, Nov 2009, Manama, Pakistan Prepared By: Umair Munaf Moon 10
  11. 11. Comparable Analysis 11 Domestic Price to Book (x) Multiple of Mid Tier Banks P/B (x) Silk Bank 0.81 JS Bank 0.46 Faysal Bank 0.50 Soneri Bank 0.67 Summit Bank 0.80 Bank of Punjab 0.46 Habib Metro 0.86 Bank Islami 0.53 Meezan Bank 2.23 Bank of Khyber 0.57 Samba Bank 0.31 Average 0.75 Note: P/B = Current Market Price (10/10/2013) / Last Qtr Book value per share The 8th GSM, Nov 2009, Manama, Pakistan Prepared By: Umair Munaf Moon
  12. 12. Valuation 12 Pakistan Price to Book (x) Multiple Valuation Approach: P/B (X) Multiple for Pakistan Mid Tier banks P/B (X) Multiple Book Value per share PKR Value per share Conservative Case 0.31 8.78 2.72 Base Case 0.75 8.88 6.66 Aggressive Case 2.23 9.00 20.07 Average P/B (x) for 11 Mid Tier banks is 0.75x Tier III banks data set includes 9 listed conventional and 2 listed Islamic Banks Islamic Banks data set includes Meezan Bank and Bank Islami Lowest, Average and highest P/B(x) considered as conservative, base and aggressive case scenario respectively The 8th GSM, Nov 2009, Manama, Pakistan Prepared By: Umair Munaf Moon
  13. 13. Factors to be Considered For IPO 13 Factors Assessment Duration of IPO Process LENGHTY IPO Market Performance WEAK Country’s Economic Outlook WEAK The 8th GSM, Nov 2009, Manama, Pakistan Prepared By: Umair Munaf Moon
  14. 14. 14 Thank You The 8th GSM, Nov 2009, Manama, Pakistan Prepared By: Umair Munaf Moon
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